India’s five largest software services companies added 24,047 people in the first quarter of this fiscal year, compared with the 13,772 net additions in FY18, a Mint report said on Wednesday. Hiring numbers are taken as an early indicator of a pickup in revenue growth; so it isn’t surprising that there is some excitement about the increase in hiring. But these numbers can’t be seen in isolation. Each of the companies that report employee utilization numbers are operating at record levels, with little leeway to service growth opportunities. As such, some amount of hiring is necessitated just for some leeway on the bench.
More importantly, the reason investors shouldn’t get carried away with hiring numbers is that none of the companies which provide revenue growth guidance are talking of a major recovery in organic revenue growth this year. According to an analyst at a multinational brokerage firm, apart from Tata Consultancy Services Ltd (TCS), all large IT services companies are expected to report either similar growth as the previous fiscal year or even a deceleration in growth. Growth may pick up marginally at Infosys Ltd, but that’s not saying much because the company was in a state of flux in the previous year.
Cognizant Technology Solutions Corp. is expected to report a drop in revenue growth rates of over 1 percentage point point on an organic basis and in constant currency. HCL Technologies Ltd is struggling for growth as well, with organic growth expected to remain in the mid-single digits. Only TCS is expected to report a meaningful acceleration in growth.
If growth isn’t picking up, why are companies hiring in large numbers, apart from announcing large deal wins every now and then? As pointed out earlier, Infosys, HCL Technologies and Wipro Ltd have reported utilization rates of around 85-86%, which is unusually high and provides little leeway if growth opportunities come their way. As such, some hiring was necessary to balance things out.
And as far as announcements of deal wins go, the key metric to also look is if there is any loss of business simultaneously. Of course, companies don’t call out these numbers, and so it is difficult to come to a conclusion. Nevertheless, it’s foolhardy to get carried away with news that represents just one side of the coin.
“Is the bookings number an indicator for material acceleration in growth ahead? We think the answer is not straightforward and depends on the extent of leakages in traditional business, defence of share against consolidation decisions and new wins. Order bookings portray only a part of the picture," analysts at Kotak Institutional Equities wrote in a note to clients.
In this backdrop, it’s best that investors look harder for signs of a recovery. It may well be that they don’t want to. Given where valuations are, any information that refutes the growth acceleration theory is perhaps best avoided.